Beardsley Ruml's Road to Ruin

Gold and gold shares have spent the year to date in a corrective mode. The
intense investment ardor of 2003 has been succeeded by disinterest and skepticism.
Gold shares, which are essentially long-dated options on the gold price, provide
the best barometer of sentiment. In 2002 and 2003, the shares outperformed
the metal by a factor of 2:1. This year, they have under-performed, with gold
up 2% and the shares down 9% (basis XAU as of November 2, 2004.) Investment
flows into US gold mutual funds have been subdued compared to 2003 and 2002,
and are down more than 60%.

As always, the key investment questions are: (1) where are we on the road
map of the secular bull market for gold; (2) are we in fact still on the road
or has it come to an end; and (3) what is the condition of the fundamental
forces behind the market direction?

To alleviate any suspense, it is our view that we are still in the early stages
of a bull market for gold and a bear market for financial assets, including
(especially) the US dollar. Our view on (1) ought to dispatch any need to discuss
(2), but it might be worth considering what to look for in judging the bull
market in gold to be over. In general, the answer to (3) is that the conditions
supporting a rising price of gold are not only intact, but, if possible, stronger
than ever.

A Brief Review of the Fundamentals

Supply and demand factors remain positive and compelling. One might think
that after a five year run in the gold price from $250 to $400+, mine supply
would be surging and demand would have receded. In fact, the opposite is true.
Mine supply, at 2500 tonnes (metric) seems likely to decline over the next
three to five years. This would likely be true even if the gold price traded
up $100/oz. and remained on this hypothetical new plateau. Demand is robust.

Gold mining is an intrinsically hardscrabble proposition. It is rarely a good
business. Rising costs have more than kept pace with the rising gold price.
In South Africa, producer of 14% of the world gold, an overvalued currency
has resulted in a declining gold price in local currency terms, contracting
margins, and shutdowns of marginal mines. Elsewhere, important cost factors
have pinched returns on sales and capital. Energy costs have seriously eroded
margins for open pit mine operations worldwide. Equipment and capital goods
price increases have drained cash not only for existing operations but raised
the ante for new mines on the drawing board. Drill rigs are hard to find, skilled
operators even more so, and assay lab backlogs are at record levels. The industry,
broadly ignorant of the need to generate returns in excess of its cost of capital,
has high graded existing mines, overproduced relative to reserve development,
continues to squander capital, and persists in opting for dilutive financings
that undermine the interests of shareholders (thereby turning away all but
the most speculative investors.)

Poor returns on capital and value-destroying mergers have caused significant
cutbacks on exploration spending, which remains 40% below the recent peak of
$1. 7 billion in 1997. The efforts of environmental NGO's, emboldened by the
financial support of tree hugging billionaires, are adding costs and challenges
unknown ten years ago for existing and proposed mines. The lead time between
discovery and first output for major new mines is easily measured in decades.

Demand for gold jewelry remains strong despite higher prices. According to
Goldfields Mineral Services, global consumer demand rose 11% in terms of tonnage
and 25% in dollars in the second quarter versus last year. The Indian subcontinent,
the largest market, will purchase 880 tonnes this year, a rise of 10% according
the MMTC, the Indian parastatal agency which tracks commodity imports. The
pattern of Indian buying, which accounts for 19% of the world jewelry consumption,
has been to absorb gold on declines but not to drive prices on the upside.
The financial market metaphor would be that of intelligent accumulation. India,
though significant in itself, exemplifies the increased appetite for gold that
goes along with third world economic growth. Elimination of import tariffs
in China and the organization of the Shanghai Gold Exchange promise to activate
demand in a potentially large market that has been a non-factor for the past
decade.

Central bank bullion bars and new mine output are sold for cash, only to be
melted down in refineries and reconstituted into fabricated shapes for jewelry.
In this manner, gold disappears into the dowries of Asian families and is no
longer for sale. Physical buying of this sort not only absorbs supply, it places
gold beyond the grasp of financial traders and issuers of derivatives such
as gold linked notes. These traders are the equivalent of gold price bookies,
with little idea of the internal fundamentals of their bets, and absolutely
no idea of the widening gap between the liquidity of gold traded as paper and
the real thing.

There are two factors driving demand for physical gold. The first is the growing
prosperity of the emerging world. The second is the rising level of commodity
prices, which acts as an important cash flow generator for segments of the
globe where derivatives are unknown or distrusted.

While third world jewelry demand sops up nearly all newly mined gold every
year, investment demand also shows signs of awakening. Investment demand for
gold as an alternative asset has been dormant for twenty-five years. Awakened,
it has the potential to swamp the supply of physical gold, which in financial
market terms is similar to a micro cap stock.

We estimate that the market cap of global gold to be approximately $1 trillion
at current prices, assuming that all central bank gold is for sale. Since all
central bank gold is not for sale, the real market cap is approximately half
of this figure. Global financial assets approximate $70-$75 trillion. Even
a small diversion of .1% from financial assets into gold would equal 2 years
of mine supply. It is a trade that can't be done at current prices. (Check
out our math in the Appendix)

It will be interesting to see what becomes of the new gold ETF (Exchange Traded
Fund) proposed for New York Stock Exchange listing. The ETF must be backed
by physical gold, to be held on deposit with HSBC in London. It is our belief
that, in time, the ETF will tap investment demand that has until now steered
well clear of the sector. An ETF launched in 2003 in London has achieved a
market cap of $739 million, and is backed by 1.8 million ounces (as of October
19th). A NYSE listed gold-backed security, in our opinion, will
be more widely accepted. It will be followed by listings on other major markets.

Conservative investors, both institutional and individual, have shied away
from mining stocks for good reason. They are risky and speculative, even if
they do provide dynamic exposure to rising gold prices. Institutions loaded
with overvalued equities and bonds would do well to consider the non-correlated
benefits of even a small commitment to physical gold, for the sake of their
beneficiaries who will need spending power twenty to thirty years from now.
Individuals and institutional portfolio managers may well come to consider
the ETF as a more effective way to protect capital than by simply raising cash.
The ETF has the potential to add several hundred dollars to the gold price,
over time, because it will facilitate access to gold for a broad range of investors
previously excluded due to inexplicably archaic mechanisms.

And what of central bank selling, the long-standing hobgoblin for gold investors?
In short, there are signs that overt official sector selling may be abating.
Although the new agreement governing central bank sales (Central Bank Gold
Agreement, March 8, 2004) permits 2500 tonnes to be sold over the next five
years, only 1900 tonnes has been spoken for. The UK has completed its sales
and Swiss have a residual of 130 tonnes. Netherlands has a small residual of
65 tonnes from its original program of 300 tonnes. According to Goldfields
Mineral Services, it is "highly improbable that, in practice, close to two
thirds of this quantity would be mobilized for sale" over the next five years.

Central bank attitudes towards gold appear to be warming. There is official
sector buying in the Persian Gulf. Argentina has purchased 40 tonnes of gold
this year, possibly as defensive move against aggressive creditor actions outside
the country. Official sector antipathy to the dollar is spreading. A scathing
review of the "dollar hegemony" by Oleg V. Mazhaiskov, Deputy Chairman of the
Russian central bank is undoubtedly on the minds of others who feel more constrained
to speak freely:

"The world has come to a paradoxical situation in which the creditor countries
are more concerned with the fate of the dollar than the U. S. authorities
themselves are. Thus, the evolution of the U. S. dollar's reserve role in
recent years has given ground to some quite pessimistic forecasts, based
on rational economic theory. No wonder that the number of people who have
held assets in dollars and now wish to diversify them partly into gold -
the traditional shelter from inflation and political adversity - is steadily
growing." (June, 2004)

Central bank supply, required to balance the market at current levels, is
waning. Increased investment demand, a wider appreciation on the constraints
of new mine supply, and a decline in central bank selling are the stuff of
a compelling commodity story. But, there is much more to this story than the
pedestrian summation of supply and demand factors.

Enter Beardsley Ruml

The DNA of financial instability is embedded in human nature. Manic highs,
gut wrenching lows, expansive assumptions as to future returns, catatonic withdrawal
into risk avoidance, a predisposition towards optimism or skepticism all originate
in the psyche. They are magnified, reinforced, and institutionalized by crowd
behavior. The ebb and flow of the tide of credit reflects the rhythmic cycling
of popular beliefs and fears over decades. The credit cycle explains how the
mythic business heroes and investment icons of one year are transformed into
the laughingstock and felons of another. It cannot be harnessed by econometric
exactitude to suit the aims of public policy, because it is a fundamental expression
of humanity at work in the financial marketplace. Still, for most politicians,
the lesson learned from the 1930's depression was that an expanded government
role could modify market outcomes to benefit society.

It is in the context of social engineering that the removal of gold from its
historical role as the official basis for money, the substitution of fiat money
as the foundation for the international credit system, and the consequent mispricing
of gold must be understood. Thirteen years after President F. D. Roosevelt
suspended private transactions is gold, the Chairman of the New York Federal
Reserve penned an article for American Affairs titled "Taxes for Revenue Are
Obsolete." Beardsley Ruml, advocating the elimination of the corporate income
tax, observed:

"The necessity for a government to tax in order to maintain both its independence
and its solvency is true for state and local governments, but it is not true
for a national government. Two changes.... have substantially altered the
position of the national state with respect to the financing of its current
requirements.

The first of these changes is the gaining of vast new experience in the
management of central banks. The second change is the elimination, for domestic
purposes, of the convertibility of the currency into gold. "(American Affairs,
Jan. 1946)

In these few sentences, Mr. Bruml anticipates the 60-year transformation of
the Federal Reserve from a traditional central bank into a central planning
agency. Bruml, as did many other post war leaders, mapped out an intellectual
framework for interventionist economic policies designed to eliminate the pain
of bad economic outcomes while presumably allowing for open-ended upside. From
that point on, the only thing that has changed is the evolution and perfection
of technique. Ruml could never have imagined the gyrations by which the future
Fed would slay any and all dragons threatening financial stability. Writing
gold out of the monetary script, foreshadowed in these remarks, was the magic
formula by which the levers of credit would be transferred from the markets
to the politicians.

The US dollar, freed from the constraint of gold backing in 1971, became the
pliable foundation for international credit. It rose geometrically in quantity
to become the essential fuel of global economic growth. Owing to surfeit, it
is on the brink of global distrust. Because of its pivotal role, few dare to
speak of it honestly as did Mr. Mazhaiskov. That is because it is more widely
held, it seems, than Internet stocks at the top. Those with large positions
can ill afford to point out its shortcomings. Global trade has been lubricated
by universal acceptance of the currency. Our Asian trading partners, needing
dollars to finance their own economic growth, find it convenient to ignore
the risks of dollar devaluation. However, Fed officials seem to be siding with
Mr. Mazhaiskov. George McTeer, outgoing President of the Dallas Fed, said on
October 8th, 2004: "theoretically, some day...the flows will turn
against us and there will be a crisis that will result in rapidly rising interest
rates and a rapidly depreciating dollar." This is quite a statement from a
regional Fed president. It is amazing that it was all but ignored in the press.

What is a dollar worth? It is too bad that there is no obvious answer. As
we have seen, many thoughtful observers have suggested, and very persuasively,
that it is overvalued and that this overvaluation is unsustainable. Some counter
that the dollar's value in terms of alternative currencies has been fairly
stable, but closer examination of the yen and euro leads to troubling questions
as to their intrinsic worth. In a world of fiat currencies with no objective
basis for value, the potential for economic misjudgments seems limitless.

The value of one single, solitary US dollar is impossible to determine. Purchasing
power parity, exchange rate versus other currencies, and purchasing power as
defined by the consumer price index do not hold the answer. All three benchmarks
are flawed. These valuation measures are subject to tinkering by governments
to suit their policy aims. We have suggested as much in "The Real Value of
a Dollar" (2/14/04), as have many others:

"In the absence of a gold standard, there is no way to protect savings from
confiscation through inflation. There is no safe store of value. If there
were, the government would have to make its holding illegal, as was done
in the case of gold." (Gold and Economic Freedom, by Alan Greenspan-1966)

The inability of players in the economic realm to judge the value of the unit
of exchange categorically leads to mistakes and imbalances that must be rectified
in due course. Fundamental analysis of return on investment, whether for family
savings or corporate spending, is meaningless in the absence of an objective
and fixed unit value of return, or numeraire . Economist David Ricardo reasoned
that a fixed and objective unit of account was essential if "one wish(ed) to
make interlocal or intertemporal comparisons (in the) problem of measuring
value". For multinational producers of goods in China destined for the United
States, a critical factor governing the return on capital, which cannot be
known today, is the future exchange rate, which dictates the number of dollars
returned for a product sold. While there is always exchange rate risk in cross
border trade, the risk would seem especially pronounced in the case of China,
which seems to be the universal justification for almost any investment proposition.

Imbalances must proliferate in the absence of an objective standard of value.
Credit is extended and capital committed based on artificial suppositions.
Asset values are marked to market on the same false pretenses. Returns are
illusory; the security of credits a fiction. It is the sort of thing that can
only happen, unchecked, in a regime of central planning.

The misdirection of capital flows in the current global economy is illustrated
by the US trade deficit, the US budget deficit, the 46% holding of US treasuries
by foreign investors, the lack any credible attempt to deal with future entitlement
claims, the pattern of aberrant behavior in housing finance and the resulting
bubble in housing prices, the disconnect between shrinking bond yields and
rising commodity prices, negative real interest rates, the overweighting of
financial stocks in the S&P 500 (20.1%), the bloated 38% share of total
after tax profits generated by financial firms, multi-year interest free new
car loans, the reckless pursuit of yield in the junk bond market, the continued
overvaluation of equity markets, the inundation of the hedge fund sector by
capital flows desperately seeking returns, over utilization of convergence
strategies, the paucity of returns for investment strategies across the board,
the buildup in corporate cash, the excessive indebtedness of the American consumer,
and the glut of golf courses, casinos and SUV's. This is only the short list.

The Treasury Department reported on October 18, 2004, that net monthly capital
inflows from the rest of the world declined for the sixth time this year. The
50% decline in net private investment from a year ago was more than offset
by a rise in Asian central bank buying. Few would disagree that the obvious
support of the dollar by foreign central banks has a finite life. These are
bad signs for the currency, but the financial markets appear to exhibit little
concern. The chart below shows that foreign private entities have drastically
reduced their purchases of US paper, and that central banks have more than
taken up the slack. Private companies and investors, not constrained by policy
objectives, are turning in their dollars to their central bankers in exchange
for local currency. Once, they held onto the marginal dollar for its appreciation
potential. Foreign central banks, on the other hand, are dutifully fighting
the market to keep their currencies undervalued to the dollar.

Chart from Kasriel, Northern Trust

How will the exit of the dollar play out? There are thoughtful arguments on
both sides of the issue of deflation versus inflation. A serious erosion of
the dollar's international exchange value will force the US to become self-financing.
Our trading partners do not need to reject the dollar outright but merely to
reduce their buying on the margin as has been the case over the last several
months. As of this writing, the trade-weighted dollar is at the low end of
its range of three years. The dollar has been against the ropes before and
has managed to rally. It will probably rally again, but within the context
of a well-established downtrend. Aside from a countertrend rally, a probe to
new lows would trigger higher interest rates, lower equity market valuations,
and higher inflation, as the President of the Dallas Fed has observed.

Dollar weakness could prove stimulative to the economy in the short run as
our hollowed-out industrial base is called upon to produce what we can no longer
afford to buy abroad. Corporate earnings might rise sharply amidst a contraction
of valuations. In short, this would be something of a replay of 1970's stagflation
triggered by the unwillingness of foreign bankers to finance our deficits in
1971 and again in 1979 in the absence of interest rate and exchange rate adjustments.
The difference between the 1970's and today is that the magnitude and proportion
of our foreign indebtedness is far greater.

The all too popular bearish view of the dollar deserves a contrarian response.
The deflationist camp notes that there is global overcapacity owing to direct
investment driven by the well-known arbitrage of labor rates between Asia and
the developed economies. Wages and prices are capped as long as our Asian trading
partners choose to finance our debt at current exchange rates. The misallocation
of capital on a grand scale has been financed by a buildup of debt on an even
grander scale. The debt position functions as a synthetic short against the
dollar, which will drive up its international exchange value as business returns
falter because excess capacity drives prices lower and forces widespread repayment
of dollar-denominated debt. A flight to safety results in miniscule government
bond yields, exploding credit spreads, and imploding capital markets.

Beware that the preponderance of bearish opinion on the dollar at this moment
could signal a conviction-shattering rally. The obvious peril to the dollar
may have been sufficiently discounted for the moment, or may still be too distant
to preclude a fake out countermove.

To many, the possibility of a rising gold price in a deflationary setting
is unlikely. For example, in a recent article titled "Gold is not Signaling
Inflation or Deflation...Yet" published October 18th by Bianco Research LLC,
the writer states that:

"Gold's nominal price changes are a function of the relationship between
the expected rate of inflation and the short-term interest rate costs of
carrying inventory, plus or minus changes in the supply/demand balance."

The accompanying chart in the article only goes back to 1997. This sort of
thinking equates the symptom of a general fall in the level of prices with
deflation but overlooks the root causes and dynamics of a deflationary meltdown.
It is easy to think that if all commodity prices are falling, then gold must
also. The article later states: "If the price of gold starts to fall more rapidly
than the dollar index increases, deflationary pressures exist and an appropriate
policy response is indicated." The direction of the general price level cannot
be confused an inflation or deflation of credit. Secular credit cycles are
beyond the control of central bankers, although central banks can certainly
augment the process of credit expansion if they already under way. A general
fall in prices can occur quite normally during a period of economic growth
that is not deflationary. However, falling prices in a deflation are only a
side effect of a general paralysis of credit. The more telling symptoms are
very low nominal interest rates, high real interest rates, and failing household
and corporate credits. Investor behavior shifts from risk taking to risk avoidance.
In a secular credit contraction, such as we are in the midst of at the moment,
the gold price rises as a measure of the demand for safety. Central bank attempts
to counter the contraction take the form of excessive paper issuance, which
for a time can inflate asset values due to surplus liquidity. Ultimately, the
market sees these actions for what they are, monetary debasement. While nominal
price levels may rise in response, as in the 1970's, economic activity stagnates.

In our view, both inflationary and deflationary scenarios explain how and
why the gold price will rise, not only in dollars, but in all currencies. The
dollar's predicament allows for more than one plausible outcome. Our contrarian
instincts at first guide us towards the deflationary camp, since it seems under-represented
in discussions of this sort. But the deflationary camp omits an important consideration,
which in our view makes a precise repeat of the 1930's impossible. That factor
is best summed up in the notion of Beardsley Ruml: sophisticated central bankers
and enlightened government policies can always create desirable outcomes. Disrespect
for market outcomes is not limited to central bankers and policy makers. It
is integral to the post World War II social compact. Dollar trashing therefore
exists not only as a notional last resort for desperate policy makers, but
also constitutes an option that would be widely applauded. According to Bob
Hoye of Chartworks :

The purpose of sound money has always been to "manage" the ambitions of
the state...In 1900, all levels of government were taking only 10% of GDP
and the public was skeptical about big government. In the last part of the
20th Century, the government take was approaching 50% and the
public had visions of government as a wish machine. (Address to the Committee
for Monetary Reform and Education, October 2004)

Acceptance of the dollar as the global reserve currency is on thin ice. As
with any overvalued security, there is no margin for anything less than perfection.
In the instance of the dollar, perfection may be defined as uninterrupted and
unthreatened economic growth, consensus belief in the same, low reported inflation,
stable financial markets, political tranquility, and a restoration of international
harmony.

Misguided Faith

What is the explanation for the persistence of investment confidence in the
face of transparent danger to the status quo implied in dollar devaluation?
Possible answers include wishful thinking, ignorance, habit, selective inputs
or a combination. Another possibility is that there is nothing to worry about
at all. The five-year rise in the price of gold can be taken as a warning or
it can be dismissed. A benign interpretation, non-threatening and consistent
with investment complacency, is that the rise is based strictly on commodity
related supply and demand factors. It can be argued that gold's dollar price
has under performed other commodities, especially oil. In deflated dollar terms,
today's $400 handle is only $200 in 1980 terms. In 1980 it peaked over $800,
or $1600 in today's money. Gold is simply tagging along in the slipstream of
oil, copper and nickel.

The complacent world view holds that financial assets will normally generate
positive returns, that the dollar doesn't matter, that the economy is now and
always can be wisely managed, and that in old age, sickness, and travail there
will always be a government backstop for individuals, businesses and investors.
That view appears to be widely shared in financial markets. The notion that
the dollar and financial assets in general are in the early stages of a multi-year
decline is alien and inconceivable. If it were otherwise, the dollar price
of gold would not be $400. It would have at least three zeros before the decimal
point.

When does reality sink in?Past behavior of the financial markets suggest that
the lags are considerable. Timing markets is hazardous. Let the tape do the
talking, as price is always the best educator. A visitor from another planet
might hypothesize that investment thinking broadly anticipates financial markets.
Reality is quite the opposite. The explanation lies in crowd psychology and
human behavior, not rational analysis:

"The sense of security more frequently springs from habit than from conviction,
and for this reason it often subsists after such a change in the conditions
as might have been expected to suggest alarm. The lapse of time during which
a given event has not happened is, in this logic of habit, constantly alleged
as a reason why the event should never happen, even when the lapse of time
is precisely the added condition which makes the event imminent."

-from Silas Marner by George Eliot, as quoted by David Richards in Barrons
( 9/20/04 )

We conclude with ardent conviction, the more so for our isolation, that the
dollar's role as the global reserve currency has run its course. The transition
to a new basis for international credit will be lengthy and difficult. The
repercussions of a transition are not reflected in the financial markets. For
this reason, gold is inadequately priced. The best strategy, under these circumstances,
is to own as much as possible of what so few have in their possession, physical
gold. While gold mining shares will perform well along the way (and should
certainly be owned), they are much easier to manufacture than the metal is
to extract. The same is true for derivatives, or paper gold. A private banker
recently told us how he had protected his clients with gold-indexed notes issued
by his employer, and that this practice was widespread in his department. We
hear similar stories from Asian and European investors. No institution contemplating
gold in four digits would issue such paper.

It is difficult to understand how a fiduciary, charged with a responsibility
to protect the purchasing power of beneficiaries, not for tomorrow or next
year, but for generations, could avoid inclusion of this asset class. At the
very least, it should appeal to the growing numbers of TIPS investors, Pimco
for example, who have come to distrust the CPI as a measure of inflation.

Any asset allocation analysis that does not incorporate gold, or that lumps
it together with other commodities, is pointless. Since 1990, the correlation
between oil and gold has been .108, according to our trusty Bloomberg. The
correlation between copper and gold has been stronger at .738. On the other
hand, gold showed virtually no correlation with the S&P (.039) or the trade-weighted
dollar (-.185), while oil correlated in a moderately positive way (.311) and
(.279) and copper in a strongly negative way (-.575) and (-.687). What does
all this mean? Absolutely nothing. The Bloomberg data covers only a 15-year
span of moderate inflation, a statistically insignificant blip in the context
of financial market history. 1930 data, not captured by Bloomberg, would show
that financial assets and commodities were highly correlated, since both imploded
against soaring gold prices.

When will the bull market in gold, still in stealth mode, run its course?
The first step would be a recognition, on the part of the financial media,
that a bull market has been in place for some time. The second step would be
for the same providers of financial misinformation to predict more of the same
and explain why.

Still, much more than a supportive financial media would be necessary to declare
that the bullish run in hard assets is history. The essential component of
a secular top for gold would be an equivalent low in financial assets. Such
lows over the past 100 years coincided with the culmination of a financial
crisis eliciting extreme response from the government. In those instances,
investor expectations were crushed and remained so for several years. In 1934,
the Roosevelt administration increased the gold price to $35/ oz., an overnight
rise of 69. 3%, the compensation required to persuade private owners to part
with the metal. From 1980-1982, the Volcker Fed increased nominal interest
rates to double digits and produced a recession, a feat of political will power
that seems unlikely to be matched for several years. With the S&P 500 trading
at 19x trailing earnings and yielding 1.7%, optimism reigns. For the government
and its policy makers of all party persuasions, it is business as usual. It
is not necessary or possible to know the headlines that will accompany the
onset of a winter in the financial markets. The passage of seasons is ordained
in all things, Beardsley Ruml and his co-visionaries notwithstanding. The peak
in the current gold bull market will coincide with the end of the road for
elitist social engineering, the government wish machine, and the hoax of unlimited
dollar issuance.

Appendix

Unlike other commodities, all the gold that has ever been mined remains above
ground. This is notionally correct even if it is not precisely so. Gold does
not get consumed in the manner of other commodities. While hard numbers do
not exist, most would agree to a rough figure of 150,000 metric tonnes of gold
have been mined over history. Of this amount, perhaps half can be considered
to be in play in the sense that it exists as financial gold. The rest exists
in museums, high-end jewelry, and other artifacts where the usage precludes
liquidity in the sense of a financial asset. Of the remaining 75,000 tonnes, approximately
31,737 tonnes are held (or thought to be held, depending on the credibility
of central bank financial statements) in central bank vaults. Let's assume
that all of it is really there, and that some portion hasn't been swapped or
lent into the physical market where it might have disappeared forever into
the souks and bazaars of the world.

The market capitalization of 75,000 tonnes of gold at $400 / ounce is $960
billion.

(1 metric tonne = 32,151 troy ounces x $400 / ounce = $12,860,400. )

1/10% of 1% of global financial assets of $70 trillion = $70 billion.

Last year's global gold production of 2,593 tonnes is valued at $33 billion.

Therefore, 2. 1 years of mine supply is equal to a diversion of 1/10% of
1% from financial assets to gold.

This commentary is not an advertisement or solicitation
to subscribe to The Tocqueville Gold Fund, which may only be made by prospectus.

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